Congratulations on owning a condo. To avoid the
hassle of running the business all by yourself, you have probably sought the
services of a condo management company. However, to ensure the business's
smooth running, you have been part of the budget-making process and have had
all the operating costs accounted for. But what happens when the need to repair
the HVAC system arises, or there is extensive damage to the swimming pool,
among other unexpected damages? Will you have the required funds to foot the
repairs and replacement? For this reason, you need to urge the management
company to create a condo reserve fund.
What Is a Condo Reserve Fund?
A condo reserve fund is a saving account
covering any condominium's unexpected expenditures such as major repairs and
replacements. It is worth noting that a reserve fund can only be accessed when
significant damages arise, and not just the regular condominium operating costs
such as cleaning the pool.
How much is enough when saving for your condo reserve fund?
According to the condominium act, 10% of all
operating budget should be transferred to the condo reserve fund. But is this amount enough? There are fewer
unexpected expenses during the first operational year as everything is new;
therefore, the amount may be enough. But as the years go by, more risks may
arise, necessitating the need to increase the amount you save in the condo
reserve fund.
For instance, the machinery in the condominium is
subject to wear and tear, and you may also need to renovate some of the condo
units, to mention a few. Therefore, if you continually save 10 percent into the
reserve fund, the amount may not be sufficient to cater to the unexpected
expenses. That's why, you should regularly conduct a condo reserve study.
What is a condo reserve study and why is it
necessary
A condo reserve study assesses a condominium's
assets to determine the amount required in a reserve fund. The study
approximates the period an asset can serve before wear and tear and the amount
necessary to repair or replace the equipment.
It helps the condo management company to plan a budget
To ensure a reliable condo reserve study, the
management company hires a competent professional reserve analyst. Therefore,
the expert analyses the existing condominium assets and predicts how long they
can operate before they need to be repaired or replaced. The reserve study
expert then advises on the amount to save into the condo reserve fund during the
budget-making process through the estimations.
It helps to prevent underfunding
A condo reserve study helps your condo management
company set aside a reasonable amount of funds into the condo reserve fund.
This ensures that the company does not underfund the account leading to
desperate measures, such as applying for high-interest loans if an unexpected
expense arises.
